Why We Use Accelerated Bonus Depreciation and Cost Segregation Studies

Real estate investing offers two powerful benefits: consistent income and long-term appreciation. At Baxter Capital Group, we believe investors deserve more than just steady cash flow; they deserve to maximize what stays in their pockets after taxes. That is why we use a combination of accelerated bonus depreciation and cost segregation studies. Together, these strategies transform real estate into not just a profitable asset class, but one of the most tax-efficient ways to grow wealth.

Depreciation itself is a gift of the tax code. The IRS allows property owners to deduct part of a building’s value each year to reflect wear and tear. Normally, a residential rental is depreciated evenly over 27.5 years, which creates steady but modest deductions. Cost segregation unlocks the hidden value inside that schedule by identifying assets that can be depreciated much faster. Components such as flooring, appliances, and cabinetry may be written off in as little as 5 years. Land improvements like paving, fencing, or landscaping often qualify for 15 years. By separating these items into shorter recovery periods, the door is opened to an enormous front-loading of deductions.

Once this study is complete, bonus depreciation takes the strategy to another level. Under current tax law (codified by Trump’s “Big Beautiful Bill” and specifically the reinstatement of 100% Bonus Depreciation), most of these short-lived assets can be written off almost entirely in the first year!!

The result is a large “paper loss” for tax purposes, even though the investor is still receiving real, positive cash flow. For example, an investor who contributes one hundred thousand dollars might see eight to ten thousand in tax-free rental distributions during the first year, but also receive a paper loss on their K-1 of twenty or thirty thousand. That loss can offset income from other passive investments, and under the right conditions it can even reduce active income or capital gains elsewhere in the portfolio.

The beauty of this approach is that it provides both immediate and long-lasting advantages. In many cases, investors enjoy four to seven years of tax-sheltered rental distributions. During that time, the property is being improved, rents are increasing, and equity is building. When the asset is stabilized, it often makes sense to refinance. This not only returns the original investment capital to the investor, it does so without triggering a taxable event. The investor now owns equity in a growing property, receives ongoing monthly income, and has their initial capital back in hand to reinvest in another opportunity.

From a logistical perspective, the process is straightforward. Once a property is acquired, we bring in a specialized engineering firm to conduct the cost segregation study. Their team carefully reviews blueprints, building records, and on-site inspections to assign values to every component. They produce a detailed report, which becomes the foundation for our accelerated depreciation schedule. Our accounting partners then apply bonus depreciation where eligible, ensuring that the maximum tax benefit flows directly to our investors. Those deductions appear on the investors’ tax statements, often shielding the majority or all of their distributions during the early years of ownership.

The real world impact of this strategy is equally compelling. Imagine receiving consistent checks every month, watching your account grow with tax-free distributions, and realizing that your equity is compounding in a real asset that also appreciates over time. It is not only about building wealth; it is about building tax-efficient wealth. That difference can add years of financial freedom to your life and create a legacy that traditional investments struggle to match.

The technical side confirms what the numbers prove. By reallocating as much as 20 to 35 percent of a property’s value into shorter-lived categories, investors capture deductions that would otherwise take decades to realize. By applying bonus depreciation, those deductions accelerate into the present, providing immediate shields against taxable income. When combined with leverage, appreciation, and strategic refinancing, the tax code allows investors to create returns that are not only strong in percentage terms but unmatched in after-tax value.

This is why we consider accelerated bonus depreciation and cost segregation studies essential parts of our investment model. They deliver cash flow that feels almost too good to be true, but is fully supported by IRS code. They allow our investors to participate in projects where the tax advantages are as powerful as the underlying real estate itself. Most importantly, they create a cycle of reinvestment: tax-sheltered cash flow leads to capital return, which leads to new opportunities, all while the original property continues to grow in value. For serious investors who want both efficiency and long-term wealth, there is no better combination.